International Airlines Group has said it is too early to judge the British Airways-Iberia merger after its strike-hit Spanish unit pushed the wider business to a near-€1bn (£863m) loss with a writedown that all but wiped out BA's profits.

IAG's chief executive, Willie Walsh, said the operating performance of the merged group was "solid" with an overall loss of €23m once exceptional costs such as the €343m writedown of Iberia were stripped out. However, he admitted that the losses at Iberia – which have struck at the rationale for the merger – were "completely unacceptable". One-off items – comprising the writedown, pension costs and a restructuring charge at Iberia – pushed the year's results into the red with a pre-tax loss of €997m compared with a profit of €503m for the same period last year.

Walsh insisted that the 2011 merger would eventually prove "fantastic" for BA. "The economic environment is clearly a lot worse than expected. You can look at this in a moment in time and say it's good or bad. This is a long-term issue for us."

He added: "BA had opportunities in the past that it didn't take up and should have. Had BA merged with [Dutch rival] KLM it would have been a fantastic result for BA. The BA and Iberia merger is going to be a fantastic event when it's judged over time. At this time, Iberia is performing at a level that's completely unacceptable, but we're going to turn that around."

He reaffirmed that IAG "remained wedded" to the original 2015 target for Iberia to contribute to the group, and said that the cost-sharing benefits of the merger had substantially improved BA's profits.

Repeating his mantra when boss of BA, Walsh said the results underlined Iberia's need to change in order to survive. Plans for 3,800 job cuts at Iberia were met with strikes last month, prompting a warning from Walsh that it was "fantasy" to believe the carrier could continue without restructuring.

He added that people in Spain were "in denial" about the need for change throughout the country, but claimed: "That is changing, as people recognise that unless there's significant change – not just in Iberia but in Spain – the environment is going to get even worse."

Group revenue was up 10.9% year on year, but that increase was outstripped by costs, including a fuel bill that rose by more than 20%.

But while BA made an operating profit of €347m, despite losses from the integrated carrier bmi that IAG acquired last year, Iberia's operating loss was €351m. The struggles of Iberia, which has been beset by strikes this month, registered in a €343m writedown that reflected how far the airline's value has fallen since its merger with BA in 2011. IAG's loss was deepened by a restructuring charge at Iberia of €202m and a non-cash charge on the wider group's pensions of €266m.

Walsh claimed that the combined airline had achieved cost savings of €313m through the merger, but further structural change was needed. He reiterated that Iberia would proceed with a 15% cut in capacity and had started the process of laying off more than 3,807 staff – triggering this month's strikes. Layoffs, he said, would start at the end of a 30-day notice period and continue throughout 2013.

Walsh said: "We have embarked on a significant transformation programme in Iberia – and these results emphasise further that the airline must adapt to survive. It must stem its cash losses and adjust its cost base permanently if it is to compete with other airlines in all its strategic markets and lay the foundations for profitable growth in the future."

John Strickland, an aviation consultant, said: "The moment of truth will be in the next year if management can push through the changes that are required. On the one hand, Spanish unions are tough and you can understand the resistance over jobs, but this a determined management – and when you look around the European airline industry, the reality is that the combination of economic conditions and tough low-cost competition on short-haul flights make change absolutely imperative."

Sky-high rise

Willie Walsh has lambasted Heathrow's "outrageous" plans to raise landing charges by almost 40% above inflation over the next five years, demanding the industry regulator impose price cuts at Britain's only hub airport.

Walsh said passengers would be "ripped off" to pay unjustified dividends to Heathrow's shareholders.

He said his airline group, IAG, the airport's biggest customer, was "watching carefully" as the Civil Aviation Authority reviews proposals for charges to rise from £19 to over £27 a passenger. Heathrow's chief executive, Colin Matthews, has defended the rise with the claim that the proceeds are needed to reward shareholders for an £11bn investment in the site over the past 10 years. Walsh said costs were already excessive because the regulator had failed to clamp down last time round. He said: "[Heathrow's] statements have been outrageous. I was surprised when I heard Colin Matthews say what he said. He didn't make too many friends... ignoring the reality of the airline industry which is struggling."

"The opportunity for significant improvement in performance at Heathrow exists without increase in costs - in fact we believe charges can be reduced."